Lobbying is a primary avenue through which firms attempt to change policy. But only a few big firms lobby and lobbying is highly persistent over time. This column argues that entry costs to the political process help explain these facts. It provides evidence from a change in immigration policy that induced firms that were already lobbying and were sensitive to the policy changes to switch from lobbying on other issues towards immigration while other firms did not enter the lobbying process.

Lobbying is a primary avenue through which firms attempt to change policy. In the US, probably the only country with systematic disclosure of lobbying activities, lobbying expenditures outnumber other forms of politically-targeted activities like campaign contributions by a factor of nine. Examples of important recent contributions to our understanding of this area are Bertrand et al (2011) and Blanes i Vidal et al (2011). While lobbying by businesses is a frequently debated issue in popular discourse, there is little systematic empirical evidence on these behaviours at the firm level.

In new research (Kerr et al 2011) we investigate firm-level determinants of lobbying participation with particular attention to the role that up-front costs may have in shaping firm behaviour. Empirical work on firm participation in the policymaking process is small, due in many cases to data constraints. Most of the available evidence comes from data on campaign contributions. These contributions often come from political action committees, which can be set up and organised by firms but which must raise money from voluntary donations from individuals.1 Recent exceptions have used firm-level data to analyse lobbying in particular sectors or activities, eg lobbying by financial services firms (Igan et al 2011), the link of lobbying to performance among large publicly traded firms (Chen et al 2010), and trade-related lobbying by Ludema et al (2010).

Firm-level evidence on lobbying

To shed light on these issues, we match data on firms' lobbying activities with other aspects of their operations. Information on lobbying behaviour is possible due to the Lobbying Disclosure Act of 1995, subsequently modified by the Honest Leadership and Open Government Act of 2007.

According to the Lobbying Disclosure Act, the term ‘lobbying activities’ refers to “lobbying contacts and efforts in support of such contacts, including preparation and planning activities, research and other background work that is intended, at the time it is performed, for use in contacts, and coordination with the lobbying activities of others”. The term ‘lobbying contact’ refers instead to "any oral or written communication (including an electronic communication) to a covered executive branch official or a covered legislative branch official". Further, a lobbyist is "any individual (1) who is either employed or retained by a client for financial or other compensation; (2) whose services include more than one lobbying contact; and (3) whose lobbying activities constitute 20% or more of his or her services during a three-month period". Any person meeting these criteria must register as a federal lobbyist under the Lobbying Disclosure Act.

These data exhibit three striking features. The first is that few firms lobby, even in the sample of publicly traded firms. Only 10% of the firms in our sample engage in lobbying in one or more years over our sample period of 1998–2006. Second, lobbying is strongly related to firm size. This is especially true at the extensive margin of whether or not to lobby but less so at the intensive margin of how much to spend on lobbying once the decision has been made to participate in the process. Finally, lobbying status is highly persistent over time. The probability that a firm lobbies in the current year given that it lobbied in the previous year is 92%.

Given the stability of lobbying behaviour over time, we consider the idea of whether they are driven by up-front costs that are associated with beginning to lobby. Such costs could include learning the complex laws about lobbying, educating newly hired lobbyists about the details of the firm's interests, characteristics, and vulnerabilities, developing a lobbying agenda, researching what potential allies and opponents are lobbying for, and investigating how best to attempt to affect the political process (eg in which policymakers to invest). Estimating an economic model of a firm's decision to engage in lobbying, we find significant evidence that up-front costs associated with entering the political process help explain all three facts. This idea has a long tradition in the political economy literature; see for example Salamon and Siegfried (1977), Masters and Keim (1985), and more recently Bombardini (2008). Their work is the first to use firm-level panel data on lobbying to test for the existence of these costs empirically.

Evidence from immigration policy

We look in-depth at a specific policy shift that has been the subject of significant public debate, ie the dramatic decline in the limit on H-1B visas that occurred in 2004. This decline was due to the expiration of prior legislation and offers an attractive laboratory. They show that this event precipitated a significant shift in firms' lobbying behaviour.

Figure 1 illustrates how firms responded to the cap expiration. Lobbying efforts for high-skilled immigration issues intensified once the H-1B cap was reduced in 2004 and became binding again for the private sector. The fraction of firms lobbying for high-skilled immigration and the ratio of new H-1B issuances to the cap (a measure of how hard it is to obtain the visas), track each other closely. The fraction of firms lobbying for immigration issues doubled from 6% to 12% between 2003 and 2004.

Figure 1. H-1B visas and lobbying behaviour

We further find that companies primarily adjusted on the intensive margin. The firms that began to lobby for immigration were those who were sensitive to H-1B policy changes and who were already advocating for other issues, rather than firms that became involved in lobbying anew. For a firm already lobbying, the response is determined by the importance of the issue to the firm's business rather than the scale of the firm's prior lobbying efforts. These estimates support the existence of significant barriers to entry in the lobbying process.

The results also shed light on a debate within the political economy literature. Some authors have suggested that lobbyists are specialists that focus primarily on a particular set of issues. An alternate view is that lobbyists can influence a wide range of issues, within the constraints of whom they know. Our findings suggest that firms can shift the set of issues that they lobby for relatively easily. This provides suggestive evidence for the ‘access’ hypothesis as opposed to the ‘expertise’ hypothesis. These results are consistent with the recent work of Bertrand et al (2011) and Blanes i Vidal et al (2011).

Conclusions

A better understanding of the role that firms play in policy determination through their lobbying efforts remains an essential objective. Continuing with the high-skilled immigration example, there are only a handful of studies that consider the role of firms in the immigration process or the consequences of policy choices on those firms. The size of this literature is somewhat surprising given the fact that the H-1B programme centres on a firm-sponsored visa (eg Kerr and Lincoln 2010). The firm identifies the worker it wishes to hire, applies for a visa on their behalf, potentially applies for a green card on behalf of the worker, and generally has a guaranteed period of time during which the worker is tied to the firm. Not surprisingly, firms attempt to define the rules of these procedures. Moreover, they lobby extensively for the capacity to make as many of these hires as they wish. Our understanding of high-skilled immigration policies requires an appreciation of the firm's roles in policy determination. The same is certainly true, if not more so, in other high profile issues like government support to automobile companies and airlines, the strength and scope of regulations on financial services, and so on. The existence of entry costs to lobbying – and their impact on firm dynamics and the composition of firms lobbying on policy issues – is an important ingredient for future work in this vein.

Understanding the micro foundations of how political institutions function is crucial for a number of questions in political economy. Entry costs can effectively ‘fix the players in the game’ with respect to the set of firms engaged in the process. These costs can thus influence policy choices through altering the composition of firms that lobby. In particular, the persistence induced by these costs likely allows firms and politicians to be able to predict what groups will work to support or oppose various policy changes. Moreover, stability in this interface between government and firms may induce persistence in political and economic institutions or raise the prospects of regulatory capture.

References

Bertrand, Marianne, Matilde Bombardini, and Francesco Trebbi (2011), “Is It Whom You Know or What You Know? An Empirical Assessment of the Lobbying Process,” University of British Columbia Working Paper.

Salamon, Lester M, and John J Siegfried (1977), “Economic Power and Political Influence: The Impact of Industry Structure on Public Policy,” American Political Science Review 71.

1 Direct political contributions by firms were prohibited by the Tillman Act of 1907. A 2010 decision by the Supreme Court in Citizens United v. Federal Election Commission granted corporations, unions, and individuals the right to donate unlimited funds to outside groups to campaign for or against candidates.